Tag Archives: tax savings

Today’s significantly reduced oil prices creates an financial opportunity for any business that maintains an inventory of products that are petroleum-based. Products such as heating oil, gasoline,lubricating oils, and diesel fuel are all obvious product types that use crude oil as their raw material. However, products such as plastics, fertilizers and other petrochemicals often are also based on crude oil prices.

If your company relies on one or more of those products and maintains an inventory, especially a large dollar value of inventory, then this might be the year for you to consider a “last in first out”(LIFO) inventory election.

Many taxpayers in the U.S.currently use (FIFO) “first in first out” which means they are always valuing their inventory using the purchase price closest to the date of the inventory. The assumption on the flow of cost is that the oldest products are sold first and the cost of the most recent additions to the inventory are maintained as the inventory value.

LIFO, on the other hand, reverses that assumption. LIFO maintains inventory values based on the original purchase price, typically the lowest price, and in effect allows current costs to be expensed as incurred. The end result is that many taxpayers who have elected LIFO 30 or 40 years ago are still valuing their inventory at the prices that were in affect at the time they made the LIFO election. This means that all the years of price increases have been expensed as a cost of sales for the year they were incurred, and none were trapped in inventory. In times of rising prices, this is a great benefit to the taxpayer.

Basically, the best time to consider making a LIFO election is at the time when raw material prices are at the lowest point. This election is simply done by attaching several forms to the year-end tax returns and is an automatically approved election by the Internal Revenue Service.

With crude oil prices being under $60 a barrel at the end of 2014, it sets the stage for those taxpayers that have not already elected LIFO to lock-in, what could be, the lowest oil prices we’ll see for years. This low cost would be part of their base inventory cost and they would gain the benefit in all future years, as prices most-likely climb.

If you have questions on any element associated with LIFO inventory or think it may be a valuable option for you, please contact your professional at William Vaughan Company as soon as possible.

The Ohio Development Services Agency recently made some changes to the InvestOhio program, an incentive program introduced in September 2011 which provides a tax credit to Ohio individual taxpayers who invest in Ohio small businesses. A brief overview of the program and new modifications, effective September 28, 2012 are presented below.

InvestOhio. At the end of 2011, Ohio enacted an income tax incentive for eligible investors; Ohio individual taxpayers, pass-through entities, trusts and estates. This incentive provides a non-refundable personal income tax credit to investors that infuse new equity (cash) into Ohio small businesses, defined below, and hold that investment for two years. The credit which is 10% of the investment is a dollar for dollar reduction in the taxable income of the investor up to $1 million per taxpayer and $2 million for married couples filing jointly.

Eligibility. Business enterprises must meet the definition of an “eligible small business”. To qualify all the following requirements must be satisfied:

At the time of a qualifying investment, the enterprise’s total assets must not exceed $50 million, OR the enterprise annual sales are $10 million or less.

The enterprise must have enough presence in Ohio to qualify. This interpreted to mean that more than half of your employees are in Ohio, OR you have more than 50 full-time equivalent employees in Ohio.

Within six months after an eligible investor’s qualifying investment is made, the enterprise invests or incurs cost in one of five categories of allowable expenses in an amount at least equal to the amount of the qualifying investment.

New Modifications, Effective September 28, 2012. Ohio recently passed a law making some new modifications to the program. Modifications of particular importance include the following:

Application fee. The application fee goes into effect for any applications received after September 28, 2012. The fee is calculated at the greater of $100 or 0.10% of the investment amount (on a $1 million investment, the possible credit would be $100,000 and you would have to pay a $1,000 application fee).

At the time of the investment, both the small business and the investor need to be in good standing with Ohio. Good standing means the business must be registered with the Secretary of State, if required, and that neither the business nor the investor is involved in illegal activities or delinquent on their state taxes.

The asset and sales caps, which limit the size of eligible small businesses, have been modified to include, related or affiliated entities. This change could push many businesses above the upper limits of eligibility. Additionally, business and investors are now required to meet all eligibility requirements, including asset and sales caps, at two different points in time; on the day of the initial investment and six months after that time (when the certificate is to be issued).

In addition to all other requirements, for each of the two years in the holding period the small business must provide records showing the number of jobs created or retained in Ohio on account of the investment. No details yet on what sort of records will satisfy this requirement.

The first-come, first-serve basis no longer applies. Ohio can now issue credits in order of completion. In other words, if you were application 0001 when the program went live, and your application was for $1 million investment to be made May 30, 2013, you could now actually be last in line as your six month period post investment date will fall at the end of the possible completion dates.

Most businesses in the current economic climate could use extra cash on hand. Cost segregation can provide this assistance through immediate tax savings. If you have purchased, constructed, remodeled, or otherwise acquired real estate (real property) after January 1, 1986, you qualify for this service. A cost segregation analysis enables the taxpayer to accelerate depreciation on components of the aforementioned real property from 39 or 27.5 years to 5, 7, or 15 years. This acceleration is what provides the taxpayer with increased depreciation deductions and immediate tax benefits.

A cost segregation is an engineered study that segregates property (real estate) into appropriate Federal Income Tax Depreciation classifications while maximizing accelerated depreciation benefits offered by the Internal Revenue Service. The following example is provided to illustrate the benefits that can be derived from cost segregation:

A newly constructed commercial building (not leasehold property) valued at $1,000,000 would normally be depreciable over 39 years without a cost segregation study. However, an engineered study would reallocate components of this real property into accelerated lives of 5, 7, or 15 years. Let’s assume in this example that 10% of the total cost ($1,000,000) was allocated to both 5 and 7 year property, 20% was allocated to 15 year property and the remaining 60% remained allocated to 39 year property.

Without the cost segregation, total allowable depreciation amounts to approximately $14,000 in year 1 (assuming June placed-in-service date) and $168,000 after 7 years. In contrast, the reallocation due to cost segregation generates total allowable depreciation of approximately $408,000 in year 1 (including Bonus Depreciation but excluding Section 179 expense) and $501,000 after 7 years.

The increased allowable depreciation produces significant tax savings and an immediate avenue for increased cash flow. In this example, gross tax savings for year 1 amounts to $408,000 (assuming a fixed 40% tax rate). Even after 7 years, the gap in allowable deductions remains considerable with $333,000 of increased accumulated depreciation that would have been otherwise deferred to later years.

Please note that the above example is for illustrative purposes only and does not reflect present value calculations or the results of state, local, and the alternative minimum tax.

William Vaughan Company offers cost segregation studies based upon guidance provided in the Internal Revenue Code, court cases, and construction cost manuals. Furthermore, the cost segregation analysis generated by William Vaughan Company’s professional team is tailored to fully comply with the IRS Cost Segregation Audit Techniques Guide. Please contact your William Vaughan Company representative for further information regarding this opportunity.